Mass. to study state’s underground economy

Effort to gauge effect on tax income, budget

Governor Deval Patrick’s administration is launching a first-of-its-kind study to define the scope and financial cost of Massachusetts’ underground economy, as investigators continue to find widespread violations of tax and labor laws, officials said Tuesday.

The study, to be conducted over the next year, will identify the extent of employment fraud by industry category, and attempt to tabulate the amount of money the state is losing each year in unpaid taxes.

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The effort will focus on the practice of illegally misclassifying workers as independent contractors, which allows companies to keep employees off the official books while benefiting from their labor. Misclassification often leads to minimum wage violations, avoidance of unemployment and payroll taxes, and failure to provide health insurance, retirement benefits, and safe working conditions.

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“We have concerns and indications that some significant percentage of the Massachusetts economy is operating in the underground economy,” said Joanne Goldstein, Patrick’s secretary of labor and workforce development. “That deprives the state of revenue, which is critical, and it deprives legitimate businesses of a level playing field.”

Goldstein stressed that most of the state’s employers operate within the laws, but she said the study is necessary to understand the extent of illegal behavior and identify areas where stepped up enforcement is needed.

The state on Wednesday will announce the results of a series of recent audits that found $11.5 million in unreported wages and 2,300 misclassified employees at an auto auction company, a home health care agency, and an adult entertainment business. The names of the companies are being withheld because of privacy rules.

But the audits underscore the extent of violations being uncovered in an array of industries. A state task force that investigates the underground economy in Massachusetts is recovering increasing amounts of money every year for tax and labor violations, from $1.4 million in 2009 to $11 million in 2011. The task force, created by Patrick in 2008, is made up of 15 state agencies that regulate employment in the state.

The amount recovered from employers is expected to increase significantly again in 2012. So far this year, the Department of Unemployment Assistance alone has collected about $11.1 million, which is more than all 15 task force agencies collected in 2011, officials said.

The upcoming study will be conducted by examining state audits and other information kept by the state Department of Revenue. That data will be compiled by the Revenue Solutions Inc., a private contractor, and analyzed by David Weil and James Rebitzer, professors at Boston University’s School of Management.

Officials said information on individual companies will not be included in the final report, which will seek to identify general areas of concern, not single out particular employers for enforcement.

Weil said that several studies have been done in Massachusetts and other states to examine the misclassification of workers in specific business sectors. But he said the new study is unusual in that it will look at a broad cross section of industries to determine the full scope of illegal activity.

“This will allow us to understand where misclassification is occurring, what the patterns are, and how it is occurring in different kinds of industries,” said Weil.

He said that his own research has found that employers are becoming increasingly detached from workers, using layers of contractors and subcontractors in a way that insulates them from liability for wage, tax, and safety violations.

Weil emphasized, however, that the study will help to improve state laws by allowing for the legitimate use of independent contractors, while pinpointing areas where stepped up enforcement is needed. “There needs to be refinement of the laws in both respects,” he said.

The study will be funded with a portion of the proceeds from a settled lawsuit against FedEx Corp. for misclassifying drivers as independent contractors. The company agreed to pay the state $3 million in 2010 to settle the claim.